Santos shares sink as gas export controls loom

Santos shares have dived 5pc after it said it would seek clarification on expected new gas export restrictions.

Goldman Sachs says ‘Santos appears most at risk’ from the any regulatory action.

Santos has said it would seek clarification on new gas export restrictions likely to be unveiled by Prime Minister Malcolm Turnbull today.

The ASX-listed giant and its partners in the $US18.5 billion ($24.7bn) Gladstone liquefied natural gas project are shaping as the biggest casualties of the plan, with investors deserting Santos (STO) shares in morning trade.

The Prime Minister is poised to announce new measures aimed at prioritising domestic gas supplies over exports in an attempt to increase local supply and bring down prices.

Under the new policy, LNG exporters that draw more gas from the domestic market than they put in will need to outline how they fill the domestic gas shortfall. Those exporters that draw from the domestic market will be ordered to limit their exports to ensure local supply.

“Santos will seek clarification of how the new policy will work in practice in order to understand from government the terms on which it is proposing to introduce this mechanism and how proposals that have been put to government to address the domestic market situation are being considered,” the company said.

“Santos will work collaboratively with government and its joint venture partners to ensure an outcome in the best interests of its shareholders.”

For now, it doesn’t appear in the best interest of shareholders as the group’s shares were down 5.5 per cent to $3.44 by 2.30pm (AEST) and have remained .

The Adelaide-based Santos has long been accused of being a major contributor to the tight gas supply situation in eastern Australia due to the reliance of its Gladstone LNG project on third-party suppliers.

The company last week revealed that some 59 per cent of the gas processed through GLNG in the March quarter had come from third parties which could have otherwise been directing that gas into domestic markets.

However, today it defended its actions, saying it had long provided “affordable” energy to the local market.

“As an Australian company, Santos has been a long term supplier of natural gas at affordable rates in support of the domestic market,” the company said.

“Moving forward, Santos will supply more gas into the Australian domestic market than it purchases for its share of LNG exports.”

The other two Queensland LNG projects, Shell’s Queensland Curtis LNG and the Origin Energy-led Australia Pacific LNG, are both net suppliers of gas into domestic markets.

GLNG is under more scrutiny than the other two Gladstone exporters because the project was approved by Santos and its partners with the full knowledge it would need to buy substantial amounts of gas from third parties in order to meet its export capacity.

The dramatic intervention could have a significant impact on Santos as it attempts to recover from a difficult few years, which has seen its share price battered and its balance sheet come under heavy pressure.

The government’s intervention could potentially open up an avenue for Santos and/or the GLNG venture to declare force majeure over some of their supply contracts.

Such a move would open up a legal path to no longer meet fixed LNG supply contracts and instead redirect that supply back into domestic markets.

The so-called “Horizon” contract, under which Santos sells heavily discounted gas from its Cooper Basin operations into the GLNG venture, has long been seen as a potential source of additional supply for the domestic gas market. Santos’s partners in GLNG would be reluctant to give up their cheapest source of supply without being able to share in the higher proceeds that would come from selling that gas into domestic markets instead.

Santos owns a 30 per cent stake in GLNG, with France’s Total and Malaysia’s Petronas each owning 27.5 per cent interests. Korea’s Kogas holds the remaining 15 per cent.

The Turnbull government will also confirm its aim to boost supply by removing state-based restrictions on exploration and development, targeting the drilling bans and moratoriums introduced by NSW, Victoria and the Northern Territory. Success on that front could potentially shape as a big boost for Santos, by removing some of the impediments in the way of the long-stalled development of its Narrabri coal-seam gas field in NSW.

The government’s proposed intervention will confirm the fears of analysts who have been concerned about the prospect of east coast LNG exporters being adversely affected by unfavourable regulatory intervention.

LNG exporters on the west coast, such as Woodside and Chevron, will be unaffected by the new policy. WA’s gas industry is already subject to reservation provisions that require the equivalent of 15 per cent of exports to be set aside for domestic use.

Earlier this week, Goldman Sachs analyst Mark Wiseman recommended investors favour the likes of Woodside and Papua New Guinea-focused LNG producer Oil Search over Santos given rising concerns about the risks around east coast gas policies. “Santos appears most at risk from east coast gas market regulation action,” Mr Wiseman warned.

The extraordinary intervention today will come a week after Mr Turnbull admonished a group of gas executives at a meeting in Canberra.

Mr Turnbull last week declared he was concerned the gas companies had not articulated how they would supply east coast households and businesses with reasonably priced gas, and instructed the Australian Competition & Consumer Commission to use its special powers to investigate confidential gas contracts.